Why Donald and Fred Trump got away with it

Donald Trump tax returns
Donald Trump tax returns
Photo illustration by Alex Law

Why Donald and Fred Trump got away with it

City, state and federal authorities could hardly keep up with the ways that money moved from father to son.
October 3, 2018

In January 1966, New York state investigators caught up with real estate developer Fred Trump. At a televised hearing of the State Investigations Commission, they asked him about the $21,000 he billed the state to lease a $3,600 dump truck and the $8,280 tile scrapers that actually cost $500 apiece for some of the many developments he built with financial support from the city, state and federal governments.

After Trump’s years of leveraging public subsidies to help construct a real estate empire and amass a personal fortune, state investigators were aware of his efforts to maximize his wealth in just about any way that he could. “Is there any way of preventing a man who does business in that way from getting another contract with the state?” commission chairman Jacob Grumet asked Trump.

This episode was “the greatest humiliation of his career,” investigative reporter Wayne Barrett wrote in his 2016 book, “Trump: The Greatest Show on Earth: The Deals, the Downfall, the Reinvention.

But humiliation did not discourage Trump from continuing to work the system to maximize wealth for his family. In fact, he was only getting started.

A blockbuster New York Times investigation of President Donald Trump’s personal fortune, published Tuesday, details the ways that his father channeled his wealth to support his son’s often-troubled business ventures. In the decades that followed the 1966 hearing, Fred Trump funneled his wealth to his children, particularly his second-eldest son Donald, who apparently was eager to take the money and expand the family brand.

Journalists would question much about the story that Donald Trump told about being a self-made man, but city, state and federal authorities could hardly keep up with the ways that money moved from father to son – including through apparently illegal means in some cases, the Times reports. For example, in 1987 when Fred Trump gave Donald more than $15 million by buying a stake in one of Donald Trump’s properties and then selling it back to him for $10,000 in what appears to be “an unreported multimillion-dollar gift and a potentially illegal tax write-off,” according to the Times.

Some of these measures were taken in part to also evade New York’s rent regulations. Fred Trump used a shell company to overbill his properties with rent-stabilized apartments for capital improvements, thus shoveling money to his children without paying the gift tax and overstating the cost of improvements he made to rent-stabilized units, allowing him to raise rents.

The New York state Department of Taxation and Finance announced Tuesday that it would open an investigation into the Trump family’s shenanigans. But to many, it was too little, too late. And it raised the question: Why were the Trumps able to underpay taxes by huge sums through blatant manipulation, such as vastly undervaluing properties to the tax authorities? After consulting with experts, based on the Times’ reporting, Crain’s New York Business concluded, “President Donald Trump and his siblings could owe New York state more than $400 million in unpaid taxes, interest and penalties.” Shouldn’t this have been caught by the government rather than a newspaper? How and why did city and state regulatory agencies fall down on the job so badly? Is it normal for rich New Yorkers, or major real estate developers, to get away with cheating of such epic proportions?

The answer may lie in part in the fiscal situation of New York City in the 1970s, 1980s and 1990s. That’s when the Trumps’ efforts to shift the family fortune from one generation to the next without paying the taxes that they normally would owe coincided with an era when New York City finances were especially precarious. This was the perfect time for developers like Trump to move money around with ease beyond the pesky view of government investigators.

“Affluent people have always hired smart lawyers,” Kenneth Fisher, a real estate attorney at Cozen O'Connor who served on the New York City Council from 1991 to 2001, said in an email. “That was even more the case in the ‘70s, 80s and ‘90s in New York when the city was in decline and enforcement budgets, like everything else were being cut.”

The million of documents filed by paper also made it difficult for tax officials to scrutinize business closely in the era before widespread use of computers and digitized records.

Elected officials also were wary of coming down too hard on people who exploited weaknesses in the tax system, because they did not want to scare away business that brought needed economic activity, according to Fisher. “That’s not to say that they wouldn’t go after someone if it fell into their laps,” Fisher said. “But government lacked the talent, tools and will to deep-dive even a fraction of the transactions that New York real estate generated every day, even in the bad times.”

In that absence of robust enforcement, the Trumps thrived not only at the expense of city, state and federal tax revenues, but the thousands of tenants who lived in Fred Trump’s properties in the outer boroughs. One way was through the 1992 creation of a company called All County Building Supply and Maintenance, which was ostensibly to be a purchasing agent for his other companies. “Instead All County siphoned millions of dollars from Fred Trump’s empire by simply marking up purchases already made by his employees. Those millions, effectively untaxed gifts, then flowed to All County’s owners – Donald Trump, his siblings and a cousin,” the Times reported. The higher prices recorded by All County were then used to justify rent increases on tenants.

Then there were the technological limitations of a time when investigators had to search for nefarious activity page by page among millions of other documents. Investigators today now have an edge they only could have dreamed of in decades past. “I think the big thing is electronic filing, which allows for data correlation,” Fisher said. But Fred Trump lived in an era when documents searches for malfeasance that take minutes now, took days, weeks, or even months.

But just because the fiscal crisis is long past doesn’t mean New York City and New York state are preventing the same sort of trickery from going on today. The New York State Office of Tax Enforcement is an agency that grabs headlines more for its pursuit of untaxed cigarettes than investigation of white collar scofflaws. One notable exception, a recently opened investigation into the Trump Foundation, arguably proves the rule: without media or political attention, rich people can often skirt tax laws with impunity. Not every real estate developer however would go so far as to set up a shell company to funnel millions of dollars to his son tax-free, but they’d likely get away with it.

There also is little preventing landlords from operating similar schemes to Trump’s to jack up rents on regulated apartments, according to Benjamin Dulchin, executive director of the Association for Neighborhood and Housing Development. State law allows landlords to increase rents on rent-regulated tenants when they make repairs to the property. “No one really vets it,” Dulchin said in an interview. “There is rampant fraud in the system because it is landlord self-certified.” One recent report from the tenant watchdog Housing Rights Initiative found that on more than 10,000 occasions in the past two year, landlords lied on building permits filed with the city and face no consequences.

In the end, Donald Trump would sell as many of his father’s properties as he could, according to the Times, adding nearly a half-billion dollars to his wealth at crucial points in his business career, when his own high-profile projects such as Atlantic City casinos, were faltering. He would end up taking the family business to previously unimagined heights – from an eponymous skyscraper on Fifth Avenue to the White House, sparking controversies and accusations of illegality all the while. The younger Trump may be the most infamous person alive, but Fred Trump still has the ability to shock people through his greed and cunning, just as he did more than 50 years ago. “Creating a third-party entity essentially to launder the receipts so you can use them to collect illegal rent increases?” Dulchin said. “That’s pretty bad. I’ve never heard of that before.” Maybe that’s just because others who did it never became president.

Zach Williams
is a staff reporter at City & State.